Social Security Act of 1935

Major Acts of Congress
COPYRIGHT 2004 The Gale Group Inc.

Social Security Act of 1935

Jerry W. Markham

Congress adopted the Social Security Act (P.L. 74-271, 49 Stat. 620) in 1935 for the purpose of providing retirement security for American workers. This legislation was a product of the New Deal legislation that spun out of the Great Depression of the 1930s.

POPULIST PROPOSALS IN THE DEPRESSION ERA

Before Congress adopted the Social Security Act a number of individuals and leaders called for government payments to assist the poor and the elderly during this economically difficult period. Their programs promised wealth to everyone. The novelist Upton Sinclair, for example, ran for governor of California in 1934 on a platform that he called the End Poverty in California Plan (EPIC). One feature of the plan was a proposal for the state of California to tax corporations for purposes of getting the necessary revenue to feed the poor and to convert bankrupt factories and farms into cooperatives. Sinclair did not win the gubernatorial race, but his EPIC plan received much attention across the country. Dr. Francis Townsend, another populist with a large following, announced a plan that would entail monthly payments of $200 to nonworking elderly people to help relieve their hardships and difficulties. Over 7,000 "Townsend clubs" with 2.2 million members supported this program. Even Hollywood advertising executives formulated plans to assist the poor; two executives promoted a "Ham and Eggs" plan that would have given thirty dollars each Thursday to elderly people.

"Kingfish" Huey Long, the demagogue , former governor and senator from Louisiana was promoting a "Share the Wealth" program, which would have made "every man a king" by providing pensions of thirty dollars per month to individuals over the age of sixty with annual incomes of less than $1,000 and no more than $10,000 in assets. Under Long's Share the Wealth program, every family in America was guaranteed a minimum annual income of $2,000, and each family was to be given $5,000 to buy a home, an automobile, and a radio. Long proposed to fund the plan by confiscating the assets of the wealthy.

While none of these plans succeeded, they were popular and placed considerable political pressure on President Franklin Roosevelt to propose a
plan of his own. A public opinion poll suggested that if Huey Long challenged Franklin Roosevelt, for example, the challenge would split the Democratic voters and could result in the election of the Republican presidential challenger, Alf Landon. Accordingly, Marion Folsom, an executive with the Eastman Kodak Company, created an alternative program for the Roosevelt administration and this program eventually became the Social Security Act.

THE GROWTH OF THE SOCIAL SECURITY ACT

The Social Security Act created a federal pension system funded by taxes on employers and employees. Social Security was not "needs based"; rather, the theory was that workers would contribute to those already retired. These workers would in turn receive benefits upon their own retirement funded by the taxes paid by those still working and from new workers entering the marketplace. The amount of benefits was not limited by the retiree's assets or income from investment sources.

The Social Security program as Congress originally enacted it did not provide universal coverage for retirement benefits but provided benefits principally for industrial employees. The legislation initially excluded most workers, including farm laborers, the self-employed, educators, household servants, casual laborers, and the unemployed.

The government mailed the first Social Security check in 1940 to Ida May Fuller in Ludlow, Vermont, just as the Depression was ending. Ida May Fuller lived for thirty-five more years, until 1975, and by that date, Congress had expanded the Social Security system to cover nearly all workers. Coverage was also broadened to include dependents of workers and disabled employees. By the end of the twentieth century, almost 150 million Americans contributed to the system and more than forty million received benefits. The government paid about 7.5 million individuals survivor benefits, and six million received disability benefits.

SOCIAL SECURITY BENEFITS AND CONTRIBUTIONS

Social Security benefits are similar to an annuity concept in that the government pays them from the time of retirement until the beneficiary and certain dependents are no longer living. The government ties the level of benefits to the workers' annual contributions and number of years the workers made the contributions. Importantly, the law does not entitle all workers to benefits, but only those who satisfy the minimum qualification requirements associated with a certain number of years of contributions. The law caps maximum benefits at a level not far above a poverty level, but many people nonetheless believe the benefits are an important entitlement the government cannot reduce or eliminate. The Supreme Court, however, has held that Social Security contributions do not entitle individuals to some contractual amount on retirement. The Court held that contributions to Social Security are not accrued property rights and that benefits may be removed or changed by Congress. In the Court's words:

The "right" to Social Security benefits is in one sense "earned," for the entire scheme rests on the legislative judgment that those who in their productive years were functioning members of the economy may justly call upon that economy, in their later years, for protection from "the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near." ... But ... [t]o engraft upon the Social Security system a concept of "accrued property rights" would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.

Congress increased Social Security benefits for the first time in 1950, but benefit levels were undercut by inflation in the 1960s. Congress increased benefits again in 1972, and then provided for automatic cost of living adjustments in subsequent years to ensure that the benefits payments kept up with inflationary pressures. This resulted in a mandate that workers pay more into the system before retirement and at the same time restricted access through increased eligibility ages for benefits. Originally, Social Security contributions were equal to a tax of three percent on salaries up to $3,000; both the employee and employer paid the tax into the Social Security fund. By 2000, the law required workers and their employers to contribute 6.2 percent (a total of 12.4 percent) on employees' salaries up to $76,200.

Congress originally intended Social Security benefits to be funded on a "pay-as-you-go" basis. This meant that the benefits paid out each year were to
be funded from the annual contributions of workers and their employers. That plan later changed to reflect the fact that the aging "baby boomer" population placed demands on the system that workers could not meet. Congress changed the Social Security system from a pay-as-you-go to a partially funded system in 1977. This meant the law imposed taxes on existing workers that exceeded the
amount needed for current payouts, but the government nevertheless collected the revenue and placed it in "trust" for future beneficiaries. This surplus was not actually placed in trust. Instead, the government used the money to pay down federal debt. When needed for Social Security, the funds will have to be reborrowed or taken from the surplus funds. In short, there is no "lockbox" where Social Security funds are being held secure for current and future recipients.

PROBLEMS AND REFORM PROPOSALS

As noted above, Congress adopted a scheme of Social Security taxes largely to pay for benefits in retirement. Eighty percent of American households now pay more in Social Security taxes than they do in income taxes—and the taxes have become burdensome. At the same time, the Social Security benefits are largely insufficient for enabling a comfortable retirement without outside sources of income. Notwithstanding the high taxes and minimal benefits, the Social Security system faces bankruptcy down the road. The Social Security Administration, the agency Congress charged with administering the system, announced it will pay out more in benefits than it will collect in taxes by the year 2015. Sometime before the year 2040, Social Security contributions will enable the government to pay only 71 percent of the benefits it owes under the law to Social Security participants. This means Congress must also dramatically cut benefits or increase contributions or both to maintain the present system in some form. Of particular concern is the fact that the number of workers paying into the Social Security system is shrinking. At the time Social Security was adopted there were twenty-five workers for each retiree. In 2002 there were about 3.25 workers for each retiree. By the year 2030, this ratio will drop to two workers for each Social Security recipient.

The Social Security system has several flaws beyond its bankruptcy. Minority and low-income individuals have shorter life spans and receive less in Social Security benefits than longer-lived, more affluent individuals. In short, criticisms of the current law abound.

Various groups have begun to examine the problems facing the Social Security system and have generated a range of proposals, including privatization, a process through which the program would change from public to private control. In January 1997, a federal advisory council was divided over the issue of whether to allow private social security accounts, but seven of its thirteen members wanted to require compulsory saving through individual accounts. Another federal advisory committee unanimously recommended the use of private accounts to supplement Social Security. The 2000 presidential election focused further attention on the issue. Following his election, President George W. Bush appointed a bipartisan panel to make recommendations on how to privatize Social Security. That committee urged partial privatization.

Advocates of Social Security reform contend that private accounts would provide far more social security and retirement benefits than Social Security, and that private accounts would make more funds available for investment, strengthening the economy for the benefit of everyone. Reformists argue that
private contributions compounding tax-free in a private account will not only enhance the retirement years of the workers but will create an estate for their descendants that will enhance their status in life. Opponents of reform claim privatization will result in a loss of the contributions already made into the system and that private accounts may incur investment losses that could devastate a pensioner. Although still controversial in many circles, the law has already effectuated privatization for the pension accounts of federal government employees. These employees may invest contributions in stocks and other securities, and the benefits received during retirement will depend on the success of those investments. State pension funds also allow employees to invest contributions in common stocks and other securities. Countries in Europe, South America, and in Australia are also privatizing some or all of their social security pensions.

BIBLIOGRAPHY

Campana, Kristen V. "Paying Our Own Way: The Privatization of the Chilean Social Security System and Its Lessons for American Reform." University of Pennsylvania Journal of International Economic Law 20 (1999): 385–421.

INTERNET RESOURCE

Three-Legged Stool Model for Retirement

Jerry W. Markham

The combination of the growth of private pension plans and the low level of Social Security benefits has resulted in a three-legged stool model for retirement in America. This means that a combination of Social Security benefits, company pension plans, and savings in personal retirement accounts are needed to have a comfortable retirement.

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Social Security Act of 1935

West's Encyclopedia of American Law
COPYRIGHT 2005 The Gale Group, Inc.

SOCIAL SECURITY ACT OF 1935

The Social Security Act (42 U.S.C.A. § 301 et seq.), designed to assist in the maintenance of the financial well-being of eligible persons, was enacted in 1935 as part of President franklin d. roosevelt's new deal.

In the United States, social security did not exist on the federal level until the passage of the Social Security Act of 1935. This statute provided for a federal program of old-age retirement benefits and a joint federal-state venture of unemployment compensation. In addition, it dispensed federal funds to aid the development at the state level of such programs as vocational rehabilitation, public health services, and child welfare services, along with assistance to the elderly and the handicapped. The act instituted a system of mandatory old-age insurance, issuing benefits in proportion to the previous earnings of persons over sixty-five and establishing a reserve fund financed through the imposition of payroll taxes on employers and employees. The original levy was 1 percent, but the rate has increased over the years. Only employees in industrial and commercial occupations were eligible for protection under the Social Security Act of 1935, but numerous important amendments have expanded the categories of coverage.

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Social Security Act

Gale Encyclopedia of U.S. Economic History
COPYRIGHT 2000 The Gale Group Inc.

SOCIAL SECURITY ACT

As the Great Depression (1929–39) in the United States continued in the early 1930s, growing unemployment created widespread fear and insecurity. Between 1929 and 1933 the unemployment rate rose from 3.2 percent to 25.1 percent. Funds from charities and local government were almost completely drained. Many demands were placed on the federal government to design and implement economic and social reforms to help abate social tensions.

One of the groups that arose during this crisis was composed of senior citizens. Led by an elderly California physician by the name of Francis E. Townsend, the "Townsend Plan" involved a government program of monthly checks of $200 to citizens over the age of 60. The only way to stay on the program was to spend all of the money each month. According to Townsend, this requirement would put money in circulation and stimulate the economy. Beginning in 1933, the group formed a network of "Townsend Clubs" with a combined membership of over 5 million, mostly older, Americans who agitated for the reform.

President Franklin D. Roosevelt (1933–45) responded to these and other concerns by appointing the Special Committee on Social Security, chaired by Secretary of Labor Frances Perkins. The committee's recommendations became the foundation for one of the most significant federal social policies in U.S. history, the Social Security Act of 1935. The Social Security Administration provided unemployment insurance, aid to the poor, and pensions for the elderly.

The Social Security System acted as a non-profit insurance company, raising funds through taxes on employers and employees for old age insurance. The size of each pension was based on how much the worker contributed to the fund. Increased earnings resulted in increased pensions. In order to build up the fund, these social security pensions were not to be dispersed before 1942. Originally, this protection did not apply to non-workers who could not contribute to a pension fund. It also did not apply to family members of a deceased pensioner and to farmers and domestic laborers (who were usually poor).

Congress amended the Social Security Act in 1939 to authorize pension payments to survivors of deceased Social Security recipients. In 1965 Medicare was added to provide health care for eligible retirees. In 1989 Social Security covered 38 million people (nearly all the elderly), and it accounted for nearly a quarter of the one trillion-dollar federal budget. In the late 1980s the poverty rate among the elderly was just below that of the general population. In 1998 discussions began about shoring up the social security program. As the 76 million baby boomers reached retirement age, there would be fewer workers paying taxes compared to the number of people drawing benefits. Without revisions, experts predicted, funds would begin to run out early in the twenty-first century.

The Social Security Act included other programs as well. Unemployment insurance was developed to provide some security against joblessness; it was funded by employee and employer taxes. In 1938 minimum wage and child labor laws were implemented, while federal disability insurance was added in 1956. In the 1960s and 1970s government assistance programs grew significantly in response to demands of liberal activists. In 1965 Medicaid was added to help support health care for the poor. In the 1960s and 1970s the food stamp program was developed, which helped the poor buy food. In 1972 the Supplemental Security Income system was enacted to provide assistance for the elderly and disabled poor.

Another arm of the Social Security Act that significantly impacted the country's social structure and created much controversy was Aid to Dependent Children (ADC). Originally, ADC was designed to help widowed mothers who could not adequately support their families. In 1950 Congress amended ADC to provide grants not only to single parents but also to their children. The program was renamed Aid to Families of Dependent Children (AFDC). Additional amendments broadened coverage to include poor, two-parent families. By the late 1980s more than three million families were receiving AFDC benefits. The growth of this program over the years sparked debate about its role in creating an underclass. While most agreed that the program provided many families with temporary assistance, as was its original intent, critics charged that it stigmatized recipients and conveyed in them a sense of hopelessness, and that it in the same time caused resentment among taxpayers. In the 1980s the focus of anti-poverty programs turned to single mothers receiving AFDC. Initially, these programs provided work training and job placement and, as incentives, they also offered childcare assistance and Medicaid for a year after the recipient began to work. In 1988 the Family Support Act required mothers without children under three to work. In the early 1990s President Bill Clinton (1993–) allowed 42 states to change their AFDC programs in any way they saw fit. These states were not required to provide job training; they could impose time limits on adults receiving assistance and they could also withdraw assistance from those who did not comply with certain conditions. Because of these changes critics predicted a potential rise in single, working poor women who were not equipped to adequately support their children.

Over the years the Social Security Act was successful at protecting a large number of individuals from various forms of suffering. However, even though social security programs have grown and expanded to provide for the poor and disadvantaged, still in 1989 about 15 percent of Americans were poor and 37 million Americans had no medical insurance. In the late 1990s conservatives and liberals, as well as special interest groups on both sides, continued to debate the advantages of restricting or expanding social programs into the twenty-first century.

Rose, Nancy E. "Work Relief in the 1930s and the Origins of the Social Security Act." Social Service Review. Chicago: The University of Chicago, 1989.

Stevenson, Richard W. "Squaring Off, at Last, on Social Security." The New York Times, November 29, 1998.

the social security system acted as a non-profit insurance company, raising funds through taxes on employers and employees for old age insurance. the size of each pension was based on how much the worker contributed to the fund.

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